State Bank Of India & Anr vs M/S. Emmsons International Ltd. & Anr

State Bank of India & Anr. .... Appellants

Versus

M/s. Emmsons International Ltd. & Anr. ....Respondents

JUDGMENT

R.M. Lodha, J.

This civil appeal, by special leave, is from the judgment

and decree of the Madhya Pradesh High Court whereby the Division

Bench of that Court allowed the first appeal of the present 1st

respondent--M/s. Emmsons International Ltd.--and set aside the

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judgment and decree of the trial court (First Additional District Judge,

Bhopal) and decreed the 1st respondent's monetary claim.

2. Unialkem Fertilizers Limited--2nd respondent in this

appeal (hereinafter referred to as `the buyer') placed a purchase

order on M/s. Emmsons International Limited (hereinafter referred to

as `the seller') for supply of 2000 MT of Syrian Rock Phosphate at

the rate of Rs. 2100/- per metric ton for an aggregate amount of Rs.

43,86,411/-. The payment terms provided `against 180 days

issuance of letter of credit'. On June 18, 1997, at the request of the

buyer, a letter of credit for Rs. 43,86,411/- was established by the

appellant No. 1 -- State Bank of India, Industrial Finance Branch,

Bhopal (hereinafter referred to as `the issuing bank') in favour of

the seller; the appellant No. 2 -- State Bank of India, New Delhi

Main Branch, New Delhi being the advising Bank. The seller

supplied the material vide sale invoice, high seas delivery, bills of

lading, etc. and the buyer is said to have accepted the documents.

3. The letter of credit established by the issuing bank, inter

alia, made the following stipulations:

" . . . . . . . . THIS DOCUMENTARY CREDIT

WHICH IS AVAILABLE BY NEGOTIATION OF

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YOUR DRAFT AT 180 DAYS FROM DESPATCH

DRAWN FOR 100.00% OF INVOICE VALUE ON

UNIALKEM FERTILIZERS LTD., E-5 PLOT NO. 4,

RAVI SHANKAR NAGAR, BHOPAL, 462 016

BEARING THE CLAUSE "DRAWN UNDER

DOCUMENTARY CREDIT NO. 0192097

LC000087 OF STATE BANK OF INDIA,

INDUSTRIAL FINANCE BRANCH, GR. FLOOR,

L.H.O. PREMISES, HOSHANGABAD ROAD,

BHOPAL - 462 011 (INDIA)." ACCOMPANIED BY

DOCUMENTS LISTED IN ATTACHED SHEET (S)

EVIDENCING DISPATCH OF GOODS AS PER

THE ATTACHED SHEETS.

FOR LIST OF REQUIRED DOCUMENTS,

MERCHANDISE DESCRIPTION AND OTHER

INSTRUCTIONS PLEASE SEE THE ATTACHED

CONTINUATION SHEETS WHICH FORM AN

INTEGRAL PART OF THIS CREDIT.

SHIPMENT FROM : SYRIA TO KANDLA, INDIA

SHIPMENT TERMS : CIF

PARTIAL SHIPMENT : ALLOWED

TRANSSHIPMENT : NOT ALLOWED

INSTRUCTION TO THE ADVISING BANK:

- ALL BANK CHARGES (OTHER THAN

ISSUING BANK CHARGES) ARE FOR

ACCOUNT OF BENEFICIARY.

- DISCREPANT DOCUMENTS TO BE SENT

STRICTLY ON COLLECTION BASIS.

- ALL DOCUMENTS TO INDICATE L/C NO.

0192097 LC 000087 AND DATE 18/06/97.

- NEGOTIATIONS UNDER THIS CREDIT ARE

RESTRICTED TO STATE BANK OF INDIA,

NEW DELHI, MAIN BRANCH, 11, SANSAD

MARG, POST BOX NO. 430, NEW DELHI -

110 001.

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- EXCEPT IN SO FAR AS OTHERWISE

EXPRESSELY STATED THIS

DOCUMENTARY CREDIT IS SUBJECT TO

THE UNIFORM CUSTOMS AND

PRACTICES FOR DOCUMENTARY

CREDITS (UCP) (1993 REVISION) OF THE

INTERNATIONAL CHAMBERS OF

COMMERCE (PUBLICATION NO. 500)

WE HEREBY ENGAGE WITH DRAWERS

AND/OR BONAFIDE HOLDERS THAT DRAFT

DRAWN AND NEGOTIATED IN CONFORMITY

WITH THE TERMS OF THIS CREDIT WILL BE

DULY HONOURED ON PRESENTATION AND

THAT DRAFTS ACCEPTED WITHIN THE TERMS

OF THIS CREDIT WILL BE DULY HONOURED

AT MATURITY. THE AMOUNT OF EACH DRAFT

MUST BE ENDORSED ON THE REVERSE

OF THIS CREDIT BY THE NEGOTIATION

BANK..........."

(Emphasis supplied by us)

4. The terms of Letter of Credit were amended on June 23,

1997 to the following effect :

"AT THE REQUEST OF THE APPLICANT

UNIALKEM FERTILIZERS LTD., E-5 PLOT NO. 4,

RAVI SHANKAR NAGAR, BHOPAL - 462 016. WE

HAVE TODAY AMENDED OUR CAPTIONED

LETTER OF CREDIT AS UNDER :

FIRST PAGE OF LETTER OF CREDIT LINE

SECOND TO READ AS : NEGOTIATION OF

YOUR DRAFT AT 180 DAYS FROM THE DATE

OF DELIVERY ORDER DATED 18/06/97 INSTEAD

OF EXISTING PLEASE MAKE THE FOLLOWING

AMENDMENTS TO ATTACHED SHEET NO. 1 OF

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L/C POINT NO. 01 TO BE DELETED POINT NO.

02 TO BE DELETED POINT NO. 04 TO READ AS

COPY OF CERTIFICATE OF SYRIAN ORIGIN

ISSUED BY CHAMBER OF COMMERCE

INSTEAD OF EXISTING. POINT NO. 05 TO READ

AS COPY OF CERTIFICATE OF QUALITY AND

QUANTITY ISSUED BY CHAMBER OF

COMMERCE INSTEAD OF EXISITING POINT NO.

12 TO READ AS DRAFT DRAWN UNDER THIS

LETTER OF CREDIT ARE NEGOTIABLE BY THE

STATE BANK OF INDIA, MAIN BRANCH, NEW

DELHI AND ORIENTAL BANK OF COMMERCE,

OVERSEAS BANK, NEHRU PLACE, NEW DELHI

ALSO INSTEAD OF EXISTING.

ALL OTHER TERMS AND CONDITIONS REMAIN

UNCHANGED."

(Emphasis supplied by us)

5. On July 8, 1997, the issuing bank received negotiated

documents under the letter of credit from Oriental Bank of

Commerce (hereinafter to be referred as `negotiating bank') for

payment. On that day itself, the issuing bank pointed out the

following discrepancies to the negotiating bank :

(i) certificate from the negotiating bank mentioning all

the terms of credit have not been furnished;

(ii) the certificate of Syrian Origin is not issued by

Chamber of Commerce.

The issuing bank, thus, advised the negotiating bank to rectify the

discrepancies within seven days of submission of documents.

5 6. Thereafter, between July 10, 1997 and February 7,

1998, the correspondence ensued through telegrams and letters

between the negotiating bank and the issuing bank. According to

the negotiating bank, the discrepancies notified by the issuing bank

were rectified and the documents complied with the requirement of

the credit. On the other hand, the issuing bank continued to insist

that the documents were discrepant; the documents presented were

not acceptable to it and it was holding the documents on collection

basis at the risk and responsibility of the negotiating bank.

7. It was then that the seller brought an action by way of a

summary suit for a decree in the sum of Rs. 63,74,356/- (principal

amount of Rs. 43,86,411/- and interest of Rs. 19,87,945/-) together

with the interest at the rate of 18 per cent per annum from the date

of the suit to the date of decree and thereafter the interest at the

same rate on decretal amount till realization against the issuing

bank and the advising bank. The buyer was impleaded as a formal

party.

8. The issuing bank (defendant no. 1) made an application

for leave to defend which was granted by the trial court. The issuing

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bank then filed written statement justifying its action of not honouring

the credit on diverse grounds, namely; (i) the certificate of origin

issued by Chamber of Commerce was different from the certificate

of origin dated March 30, 1997 issued by the supplier of the material;

(ii) neither the description of goods nor the quantity or weight

matched with each other in the above documents; (iii) the certificate

of origin has been issued in favour of MMTC and not in favour of the

seller; (iv) at the request of the negotiating bank, the documents

were retained by it but only on collection basis in order to remit the

amount after collecting the same from the buyer and (v) it has acted

in accord with Uniform Customs and Practice for Documentary

Credits (for short, ` UCP500').

9. On the pleadings of the parties, the trial court framed the

following five issues :

"Issue No. 1. Whether respondent Nos. 1 & 2 have dishonoured the

documents relating to the "letter

of credit" against the rules and

practice?

Issue No. 2. Whether applicant is eligible to

get Rupees 43,86,411/- and 18

percent interest p.a. over it from

respondent Nos. 1 & 2 on the

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basis of letter of credit given by

them?

Issue No. 3. Assistance and expenses?

Issue No. 4 Whether respondent is eligible to

get Rs. 14,258/- as

handling/collection fee from

applicant?

Issue No. 5. Whether applicant has accepted

the encashment of bill and

document on collection basis?"

It may be noted that trial court has referred to the seller as applicant

and the issuing bank (defendant no. 1) and the advising bank

(defendant no. 2) as respondent nos. 1 and 2 respectively.

10. The parties tendered oral as well as documentary

evidence in support of their respective case.

11. The trial court after viewing the evidence and hearing the

arguments held that the issuing bank has properly dishonoured the

documents relating to the letter of credit and the seller was not

entitled to get any amount or interest from the issuing bank and the

advising bank on the basis of that letter of credit. The trial court has

also concluded that seller accepted the encashment of bill and

document on collection basis. In light of these findings, the trial court

vide its decision dated February 4, 2002 dismissed the seller's claim.

8 12. The seller filed first appeal against the judgment and

decree of the trial court before the High Court of Madhya Pradesh.

As noted above, the Division Bench of that Court allowed the seller's

appeal and granted a decree to the seller as prayed in the suit.

13. The legal position appears to be fairly well-settled that a

draft with accompanying documents must be in strict accord with the

letter of credit. If the documents presented comply with the terms of

the credit, the issuing bank must honour its obligation in accordance

with the terms of credit. In United Commercial Bank v. Bank of India

and others1, this Court referred to few decided cases of the English

Courts, Halsbury's Laws of England and also couple of books on

the subject by eminent authors--Davis' Law Relating To

Commercial Letters of Credit, 2nd Edn. (at page 76) and Paget's Law

of Banking, 8th Edn. (at page 648)--and it was held that the

documents tendered by the seller must comply with the terms of the

letter of credit and that the banker owes a duty to the buyer to

ensure that the buyer's instructions relative to the documents

against which the letter of credit is to be honoured are complied with.

It was stated that the description of the goods in the relative bill of

1 (1981) 2 SCC 766

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lading must be the same as the description in the letter of credit,

that is, the goods themselves must in each case be described in

identical terms, even though the goods differently described in the

two documents are, in fact, the same. The Court reiterated, ` . . . . . .

a bank issuing or confirming a letter of credit is not concerned with

the underlying contract between the buyer and seller. Duties of a

bank under a letter of credit are created by the document itself, but

in any case it has the power and is subject to the limitations which

are given or imposed by it, in the absence of the appropriate

provisions in the letter of credit'.

14. Where the customer of bank instructs the bank to open a

credit, the bank acts at its peril if it departs from the precise terms of

the mandate.

15. Lord Diplock in Commercial Banking Co. of Sydney Ltd.

v. Jalsard Pty. Ltd.2 stated at page 286 of the Report that the issuing

banker and his correspondent bank have to make decisions as to

whether a document which has been tendered by the seller complies

with the requirements of a credit.

2 (1973) AC 279

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16. It needs no emphasis that a contract is concluded

between the issuing bank and the seller no sooner the bank issues

the credit and communicates it to the seller. Under an irrevocable

credit the issuing bank gives an unequivocal and binding

undertaking to the seller that it will pay against documents/bills

drawn in compliance with the terms of credit.

17. The relevant clauses of Articles 13, 14 and 19 of UCP

500 read as under:

"Article 13.

Standard for Examination of Documents

a Banks must examine all documents stipulated in the

Credit with reasonable care, to ascertain whether or

not they appear, on their face, to be in compliance

with the terms and conditions of the Credit.

Compliance of the stipulated documents on their face

with the terms and conditions of the Credit, shall be

determined by international standard banking practice

as reflected in these Articles. Documents which

appear on their face to be inconsistent with one

another will be considered as not appearing on their

face to be in compliance with the terms and

conditions of the Credit.

Documents not stipulated in the Credit will not be

examined by banks. If they receive such documents,

they shall return them to the presenter or pass them

on without responsibility.

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b The Issuing Bank, the Confirming Bank, if any, or a

Nominated Bank acting on their behalf, shall each

have a reasonable time, not to exceed seven banking

days following the day of receipt of the documents, to

examine the documents and determine whether to

take up or refuse the documents and to inform the

party from which it received the documents

accordingly.

c . . . . . . .

Article 14.

Discrepant Documents and Notice

a . . . . . .

b Upon receipt of the documents the Issuing Bank

and/or Confirming Bank, if any, or a Nominated Bank

acting on their behalf, must determine on the basis of

the documents alone whether or not they appear on

their face to be in compliance with the terms and

conditions of the Credit. If the documents appear on

their face not to be in compliance with the terms and

conditions of the Credit, such banks may refuse to

take up the documents.

c If the Issuing Bank determines that the documents

appear on their face not to be in compliance with the

terms and conditions of the Credit, it may in its sole

judgement approach the Applicant for a waiver of the

discrepancy(ies). This does not, however, extend the

period mentioned in sub. Article 13 (b).

d . i. . . . . . .

ii. Such notice must state all discrepancies in

respect of which the bank refuses the

documents and must also state whether it is

holding the documents at the disposal of, or is

returning them to, the presenter.

iii. . . . . . . . .

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e If the Issuing Bank and/or Confirming Bank, if any,

fails to act in accordance with the provisions of this

Article and/or fails to hold the documents at the

disposal of, or return them to the presenter, the

Issuing Bank and/or Confirming Bank, if any, shall be

precluded from claiming that the documents are not in

compliance with the terms and conditions of the

Credit.

f . . . . . . . . . .

Article 19.

Bank-to-Bank Reimbursement Arrangements

a . . . . . . .

b Issuing Banks shall not require a Claiming Bank to

supply a certificate of compliance with the terms and

conditions of the Credit to the Reimbursing Bank.

c . . . . . . . .

d . . . . . .

e . . . . . . ."

18. In light of the above legal position, we heard Mr. R.K.

Sanghi, learned counsel for the appellants and Mr. Shyam Divan,

learned senior counsel for the 1st respondent for some time. In the

course of hearing, however, it transpired that the High Court in its

judgment that runs into 56 foolscap pages while reversing the

judgment of the trial court, has not at all adverted to issue no. 5

framed by the trial court nor it considered or upset the finding of the

trial court on that issue.

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19. Mr. Shyam Divan, learned senior counsel for the seller -

1st respondent fairly stated that the finding on issue no. 5 recorded

by the trial court has not at all been considered in the impugned

judgment although, he strenuously urged that once the

discrepancies on the basis of which the issuing bank refused the

documents were rectified and the time allowed for encashment had

expired, the issuing bank was obliged to honour the letter of credit

and the case set up by the issuing bank that the seller had accepted

the encashment of bill and document on collection basis was false

and frivolous.

20. Having regard to the controversy set up by the parties in

the course of trial, in our view, it cannot be said that issue no. 5 is

immaterial or finding of the trial court on that issue is

inconsequential. The High Court was hearing the first appeal and,

as a first appellate court it ought to have considered and addressed

itself to all the issues of fact and law before setting aside the

judgment of the trial court. The judgment of the High Court suffers

from a grave error as it ignored and overlooked the finding of the trial

court on issue no. 5 that the seller accepted the encashment of bill

and document on collection basis. The High Court was required to

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address itself to issue no. 5 which surely had bearing on the final

outcome of the case.

21. In Santosh Hazari v. Purushottam Tiwari (Deceased) by

L.Rs.3, this Court held (at pages 188-189) as under :

"........The appellate court has jurisdiction to reverse

or affirm the findings of the trial court. First appeal is

a valuable right of the parties and unless restricted

by law, the whole case is therein open for rehearing

both on questions of fact and law. The judgment of

the appellate court must, therefore, reflect its

conscious application of mind and record findings

supported by reasons, on all the issues arising

along with the contentions put forth, and pressed by

the parties for decision of the appellate court. ...

while reversing a finding of fact the appellate court

must come into close quarters with the reasoning

assigned by the trial court and then assign its own

reasons for arriving at a different finding. This would

satisfy the court hearing a further appeal that the

first appellate court had discharged the duty

expected of it......"

22. The above view has been followed by a 3-Judge Bench

decision of this Court in Madhukar and Others v. Sangram and

Others4, wherein it was reiterated that sitting as a court of first

appeal, it is the duty of the High Court to deal with all the issues and

the evidence led by the parties before recording its findings.

3 (2001) 3 SCC 179

4 (2001) 4 SCC 756

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23. In the case of H.K.N. Swami v. Irshad Basith (Dead) by

LRs.5, this Court (at pages 243-244) stated as under :

"The first appeal has to be decided on facts as well

as on law. In the first appeal parties have the right

to be heard both on questions of law as also on

facts and the first appellate court is required to

address itself to all issues and decide the case by

giving reasons. Unfortunately, the High Court, in

the present case has not recorded any finding

either on facts or on law. Sitting as the first

appellate court it was the duty of the High Court to

deal with all the issues and the evidence led by the

parties before recording the finding regarding

title.........".

24. Again in Jagannath v. Arulappa and Another6 while

considering the scope of Section 96 of the Code of Civil Procedure,

1908, this Court (at pages 303-304) observed as follows :

"2. A court of first appeal can reappreciate the

entire evidence and come to a different conclusion.

In the present case, we find that the High Court

has not adverted to many of the findings which had

been recorded by the trial court. For instance,

while dismissing the suits filed by the respondents,

the trial court had recorded a finding on Issue 5

that the defendant-appellant had taken actual

possession of the suit properties in Execution

Petition No. 137 of 1980 arising out of OS No. 224

of 1978. Without reversing this finding, the High

Court simply allowed the appeals and decreed the

suits filed by the plaintiff-respondents in toto.

Similarly, there are other issues on which findings

recorded by the trial court have not been set aside

5 (2005) 10 SCC 243

6 (2005) 12 SCC 303

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by the High Court. The points involved in the

appeals before the High Court required a deeper

consideration of the findings recorded by the trial

court as well as the evidence and the pleadings on

record."

25. The decided cases of this Court in Jagannath6 and

H.K.N. Swami5 were noticed by this Court in a later decision in the

case of Chinthamani Ammal v. Nandagopal Gounder and Another7.

26. In our view, the High Court failed to follow the

fundamental rule governing the exercise of its jurisdiction under

Section 96 of the Code of Civil Procedure, 1908 that where the first

appellate court reverses the judgment of the trial court, it is required

to consider all the issues of law and fact. This flaw vitiates the

entire judgment of the High Court. The judgment of the High Court,

therefore, cannot be sustained.

27. For the above reasons, we accept the appeal, set aside

the impugned judgment of the High Court and restore First Appeal

No. 225 of 2002 for re-hearing and fresh decision. All contentions of

the parties are kept open to be agitated at the time of the hearing of

the first appeal. No order as to costs.

7 (2007) 4 SCC 163

17

.........................J.

(Aftab Alam)

........................ J.

(R.M. Lodha)

NEW DELHI.

AUGUST 18, 2011.

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